Creating a bridge to expand the remit of ILS: Panel at ILS NYC 2021

The focus of the insurance-linked securities (ILS) market on short-tail catastrophe risks has resulted in a funding gap for longer-tail exposures, but as investor comfort increases, there’s an opportunity for the market to expand its remit.

The third day of our virtual Artemis ILS NYC 2021 conference began with the event’s first panel session, which focused on spreading the word of alternative capital beyond catastrophe risk.

“We believe that the industry has long been transacting with the capital markets for many of those exogenic, short-tail capital heavy risks, essentially leaving a funding gap for longer-tail risks,” said Yaniv Bertele, Co-founder and Chief Executive Officer (CEO) of Vesttoo, a gold sponsor of the conference.

He continued to explain that this focus on cat risk has left a funding gap for longer-tail risks associated with areas such as longevity, mortality, motor claims, general liabilities, and long term care.

According to Bertele, the capital markets has an opportunity to capture these risks across combined balance sheets of the re/insurance industry.

“Creating essentially a bridge between those two industries that goes way beyond the cat risk. I believe that once the One Stop solution is out there, enabling those two industries to communicate in a proper, single conversation, understanding each other’s needs and risks, we can democratise the capital markets,” he explained.

The expansion of ILS into longer-tail lines has been a topic of debate for some time and in more recent years, talk has turned into action. However, the expansion into longer-tail lines remains in its infancy but as noted by panellist Kenneth Durbin, SVP at reinsurance broker Guy Carpenter, investor appetite is on the rise.

“Within the last couple of years, as the ILS market has matured, we’ve certainly seen an increased appetite from the casualty market, specifically exposures like personal and commercial auto, terrorism, contingency covers, business interruption, and even cyber risk could ultimately fall within the ILS scope,” said Durbin.

“Essentially, as investors become more comfortable with the quantification of risks in these lines of business, we’ll continue to see an expanded range of exposures that fit the appetite for the ILS market investors. So, I think we’re still just scratching the surface from the ILS markets perspective,” he added.

As noted by Bertele, the market has an opportunity to create structures and solutions to enable not only new perils to come to market, but also to enable new and different types of sponsor, such as life insurers, to access the market in a meaningful way.

Panellist Matt Beard, Managing Director at Guy Carpenter, explained that while life carriers can certainly entertain bringing in ILS on the asset side, the fact most ILS securities are not rated is a struggle which leads to punitive capital charges.

“When securities are long and dated, like the casualty lines of business would bring to the ILS product, that will begin to allow these securities to be rated,” said Beard. “And, if we begin to go down that path, the ILS sector will open up non-cat risks so that securities can be issued and life companies will be a big, big logical buyer of those assets.

“And, so, as we start to be able to bring more of a rating and structure to the ILS world, it certainly should open up another line of capital from life insurance companies alongside pension funds and the other capital sources.”

The panel discussion also featured Thibaut Adam, Managing Director at financial services giant Citi, who explained that in today’s world, there’s cat specialist funds that are all, to a degree or another, also expanding into the life risk.

“This is just a very small portion of the available capital. Opening up the rest, I think requires patience, and requires both modelling confidence, and two way flow that would enable and trigger that ecosystem,” said Adam.

Adding, “Today, to transact life risk, you need to be able to put up significant amounts of collateral. If we have more standardised product, where the collateral is made efficient for both the cedent and the risk taker, then I think we stand a much better chance to grow out of the usual nat cat, cat bond type of universe.”

The session, which was broadcast first to event registrants on Tuesday 10th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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